Surety Bond Guarantee
Working as an independent contractor carries with it an inherent level of risk. Although submitting references, samples or photographs of past work and client testimonials are all good ways to provide evidence of previous satisfactory work, many clients, including the federal government, require more. Surety bonds are a way to provide an additional layer of protection for both your company and prospective employer.
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Identification
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Surety bonds involve three separate entities. The first is the principal. This is the contractor, either a business or specific person, who will actually be doing the work. The second is the obligee, which in many cases is a commercial or federal agency. The third is the surety, an outside agency that issues and guarantees the surety bond. A surety company performs much like an insurance agency, so if your employer has an issue with your work, he files a claim and works with the surety company rather than with you as the contractor.
The Facts
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Surety bonds are common in the construction industry, whether you work in the private sector or are looking for opportunities with local, state or federal government agencies. In the private sector, surety companies are often a division of an insurance company, so although you have the option to shop around, in most cases you should be able to go through the company issuing your business insurance policy. According to the Surety Information Office, the cost of obtaining a surety bond can range from about .05 to 2 percent of the contract price, depending on factors such as the contractor as well as the type, size and time frame of the job.
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Bond Guarantees
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On each individual project, surety companies provide and guarantee a combination of three basic bonds. These include bid, performance and payment bond guarantees. The bid bond guarantees that if the contractor wins the bid, he will, in fact, enter into and begin work on the contract. The performance bond guarantee ensures that not only will the contractor perform all work according to the terms of the contract but also pay all amounts due to subcontractors and material suppliers. Finally, the payment bond guarantee assures subcontractors and material suppliers they will receive payment.
Government Guarantee Programs
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Because the size and cost of the surety bond relates to the job on which you are bidding, it can become too expensive for new or small contractors. In this case, consider going through government surety bond guarantee programs such as the Small Business Administration's Surety Bond Guarantee Program. As of the 2011, the SBA's SBG program provides two types of bond guarantees for projects totaling $2 million or less. The Prior Approval Program can provide a guarantee of 80 to 90 percent of a surety bond, depending on the job, and the Preferred Surety Program can provide a guarantee of 70 percent. Another option to consider is the Model Contractor Development Program. This program provides education, assistance and referrals to small, minority and women contracting companies.
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References
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- Photo Credit Hard working construction worker at a construction scene. image by Andy Dean from Fotolia.com
